Taking The House’s Money (Alfred Lee)

Repositioning Profits From Junior Gold Trade For Time Being

Alfred Lee, CFA, DMS, Investment Strategist, BMO ETFs, Global Structured Investments

September 3, 2010

Recent Developments:

  • In the August edition of our BMO ETF: Monthly Strategy Report titled "Not So Golden Month For Gold Bullion," we recommended to our readers that it was a good buying opportunity for gold and small-cap gold companies through exchange-traded funds (ETFs). Since we launched the report on August 10, the BMO Junior Gold Index ETF, which tracks the Dow Jones Junior Gold Index has risen 14.9% and roughly 35.5% since we first recommended it in mid-February.
  • As this trade has worked out far faster than we expected, we recommend trimming positions in small-cap gold at this point given its recent run up. As our readers are aware, we have been very bullish on gold this year and in particular, the small-cap producers. While, we still remain very positive on gold and particularly small-cap gold companies over the long-term, we wouldn't be surprised to see a correction over the near-term.
  • At this point, we recommend investors take the profit portion of the trade and reallocating to fixed income for the time being and waiting for a pullback before reinvesting. For example, a $50,000 position executed on August 10 would have generated a $7,450 profit ($50,000 x 14.9% = $7,450). Investors can take the $7,450 profit and reallocate to short-term federal or provincial bonds. For those investors who want to maintain an equity exposure, we recommend reducing beta through sectors such as utilities, given the current weakness in the markets.


  • Investors that want to execute this trade can easily do so in one trade through the following ETFs:
  • Investors can access short-term federal bonds through the BMO Short-Federal Bond Index ETF (ZFS). This ETF tracks the DEX Short Term Federal Bond Index, which tracks bonds issued by the Government of Canada with maturities of between one- and five-years.
  • For those investors that want exposure to short-term provincial bonds, there is the BMO Short-Provincial Bond Index ETF (ZPS). This ETF tracks the DEX Short Term Provincial Bond Index, which tracks bonds issued by the Canadian provinces with maturities of between one- and five-years.
  • For investors preferring to maintain equity exposure, we would recommend defensive positions at this time. Exposure to utility stocks can be accessed through the BMO Equal Weight Utilities Index ETF (ZUT). This ETF tracks the Dow Jones Canada Select Equal Weight Utilities Index which is made up of 17 Canadian utility stocks using an equal weight methodology.

Chart A: Short-term Sentiment Is Overly Optimistic

Source: Bloomberg, BMO ETFs

Chart B: Short-Term Fixed Income Has Provided Stability Since Market Softened

Source: Bloomberg

Chart C: Utility Stocks Have Lower Beta Than Broad Market

Source: Bloomberg

*All prices as of market close September 2, 2010 unless otherwise indicated.

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